Step 529

The federal government created the Step 529 in order to help families save for college.  Step 529 have grown in popularity since their creation in 1997.  You deposit your after tax income into a 529 account, it then grows tax free, and you, or your child can withdraw tax free up till 2010 to pay for higher education.  In 2010 Congress has the right to extend these tax benefits.  If they choose to not extend this law, then the money that is withdrawn by the student will be taxed at income.  In May of 2005, bills were introduced in both the House and Senate that would make 529 plans permanently tax-free. "There's a 50-50 chance we will end the sunset provision before the end of the year," reckons Joseph Hurley, founder of Savingforcollege.com.

Students don't usually earn much, so their tax bracket should be relatively low, therefore you will still make money using this plan even if Congress doesn't extend all the tax breaks.  If you use a Step 529 that is in your own state, there can be significant tax breaks, some states allow you to deduct the amount deposited annually from your state tax return, however some of the programs are charging such high fees that it will wipe out your deduction.  Do research on the programs available in your state, make sure the fees are reasonable, management fees should not be more than 1%.

When depositing money into a Step 529, you will asked to choose from various investment options.  You can afford to be more risky if your child is very young, because you have time to recoup any money that is lost from bad market years.  Since these are investments it is always possible to lose money.  If you are close to the time for withdrawing money, then you should purchase less risky investments, such as bonds.  The maximum a person can contribute to a step 529 is $100,000.  Step 529 will impact your financial aid package, because they will be considered the assets of the parents.

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The parent remains in control of the account, so if your child decides not attend college, you can transfer the funds to another child, yourself, your spouse, a sibling, or 1st cousin.  If you choose to not use the money for education, then you will have to withdraw the money with a 10% penalty and pay any capital gains tax on earnings.

Step 529 is regarded as the best saving vessel for college that is currently in existence by financial planners.  You can put up to $55,000 in an account at once.  Step 529s are the most effective when the child is very young, or else there won't be enough time to compound the earnings.